(Updates headline, lead paragraph, rates; adds auction news,
analyst quotes)
By Kate Duguid
NEW YORK, Sept 13 (Reuters) - U.S. Treasury yields across
maturities dropped to session lows in morning trading on
Thursday after data showed U.S. consumer prices rose less than
expected in August, moderating expectations that the Federal
Reserve will raise interest rates another two times in 2018.
The Labor Department said its consumer price index increased
0.2 percent last month after a similar gain in July, with the
year-over-year number slowing to 2.7 percent from 2.9 percent,
as increases in gasoline and rent were offset by declines in
healthcare and apparel costs. Underlying inflation pressures
also appeared to be slowing.
Excluding the volatile food and energy components, the CPI
edged up 0.1 percent. The so-called core CPI had increased by
0.2 percent for three straight months. In the 12 months through
August, the core CPI increased 2.2 percent after rising 2.4
percent in July.
The Fed is widely expected to raise interest rates at its
policymaking meeting in September, but a fourth rate hike in
December remains an open question that depends, in part, on
where inflation falls in relation to the central bank's 2
percent target.
Market expectations of a September hike fell on Thursday to
95 percent from 99.2 percent a day earlier, according to CME
Group's FedWatch tool. Expectations of a December hike also fell
modestly from 80.4 percent on Wednesday to 77.8 percent after
the data release.
Still, some analysts were not deterred.
"CPI was much weaker than expected. The headline was less of
a surprise than the core reading. When you look at the pieces,
there's less to that story as it was in healthcare and in
clothing prices primarily. Both of those should rebound in the
months ahead," said Stan Shipley, strategist at Evercore ISI.
Strong demand at an auction of $15 billion 30-year notes
later in the day could also drive prices up at the long end of
the curve, tamping down yields. The U.S. Treasury Department on
Wednesday sold $23 billion of 10-year government notes amid
robust demand.
"The 10-year demand was better than we expected to hear. We
have the 30-year yield well over 3 percent, and now with
inflation being an issue, I would expect demand to be good in
that space too," said Shipley.
The yield on the 30-year bond fell 2.9 basis
points following the CPI data release to 3.092 percent. The
yield on the two-year note fell to 2.740 percent from
a high of 2.773 earlier in the day. The 10-year note yield
was last at 2.952, down from a session high of 2.983
percent.
September 13 Thursday 9:18AM New York / 1318 GMT
Price
US T BONDS DEC8 142-21/32 0-12/32
10YR TNotes DEC8 119-144/256 0-32/256
Price Current Net
Yield % Change
(bps)
Three-month bills 2.1025 2.143 -0.008
Six-month bills 2.265 2.3229 0.005
Two-year note 99-200/256 2.74 -0.008
Three-year note 99-214/256 2.8075 -0.014
Five-year note 99-146/256 2.8433 -0.019
Seven-year note 99-8/256 2.9046 -0.020
10-year note 99-104/256 2.9443 -0.019
30-year bond 98-80/256 3.0867 -0.019
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 17.75 0.25
spread
U.S. 3-year dollar swap 15.50 -0.25
spread
U.S. 5-year dollar swap 12.75 0.00
spread
U.S. 10-year dollar swap 6.75 0.25
spread
U.S. 30-year dollar swap -6.50 0.25
spread
(Reporting by Kate Duguid; Editing by Bernadette Baum)